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Fiscal Consequences of Financial Crises Carmen M. Reinhart, University of Maryland, NBER Schwartz Economic Symposium, September 15, 2009 based on: This.

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Presentation on theme: "Fiscal Consequences of Financial Crises Carmen M. Reinhart, University of Maryland, NBER Schwartz Economic Symposium, September 15, 2009 based on: This."— Presentation transcript:

1 Fiscal Consequences of Financial Crises Carmen M. Reinhart, University of Maryland, NBER Schwartz Economic Symposium, September 15, 2009 based on: This Time is Different: Eight Centuries of Financial Folly with Kenneth S. Rogoff (Princeton University Press, 2009)

2 Reinhart and Rogoff2 As to the fiscal aftermath of banking crises, we find: That the nearly universal focus on calculations of bailout costs as the centerpiece of the fiscal consequences of banking crises is misguided and incomplete. That the nearly universal focus on calculations of bailout costs as the centerpiece of the fiscal consequences of banking crises is misguided and incomplete. Banking crises weaken fiscal positions beyond the costs of bailouts, as government revenues contract and stimulus plans find favor. Banking crises weaken fiscal positions beyond the costs of bailouts, as government revenues contract and stimulus plans find favor.

3 Reinhart and Rogoff3 Financial crises are historically associated with the deadly Ds Sharp economic downturns follow banking crises; with government revenues shrinking, fiscal deficits worsen; deficits lead to debt; as debt piles up rating downgrades follow. For the most fortunate countries, the crisis does not lead to the deadliest D: default, but for many it has.

4 Reinhart and Rogoff4 On the first point, the discrepancies across estimates of bail-out costs are large and in, some cases, staggering

5 Reinhart and Rogoff5 Fiscal deficits as a percent of GDP

6 Reinhart and Rogoff6 On the second point, government revenues suffer as the crisis lingers

7 Reinhart and Rogoff7 Thus, the true legacy of financial crises is more government debt…

8 Reinhart and Rogoff8

9 9 Policy issues going forward Soaring debt: Policy makers should be concerned about the debt levels (explicit and implicit) that it is likely to take on as it works its way out of the crisis Soaring debt: Policy makers should be concerned about the debt levels (explicit and implicit) that it is likely to take on as it works its way out of the crisis Financial crises are hardy perennials-- regulation needs to be constantly revised and revisited to keep up with market innovation. Financial crises are hardy perennials-- regulation needs to be constantly revised and revisited to keep up with market innovation.


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